Economic activity in the U.S. exceeded expectations in the second quarter, driven by strong consumer spending, government expenditures, and a significant increase in inventories, as per the initial estimate released by the Commerce Department on Thursday.
The real gross domestic product (GDP), which measures all goods and services produced from April to June, grew at an annualized rate of 2.8% after adjusting for seasonality and inflation. Economists surveyed by Dow Jones had anticipated a growth rate of 2.1% following a 1.4% increase in the first quarter.
Consumer spending, private inventory investment, and nonresidential fixed investment were key contributors to the growth, as indicated in the first of three estimates provided by the department.
Personal consumption expenditures, a major indicator of consumer activity in the Bureau of Economic Analysis report, rose by 2.3% in the quarter, up from a 1.5% increase in Q1. Both goods and services spending showed significant growth during the quarter.
Inventories played a substantial role, contributing 0.82 percentage points to the overall gain. Government spending also provided support, with a 3.9% increase at the federal level, including a 5.2% surge in defense outlays.
However, imports, which detract from GDP, rose by 6.9%, marking the largest quarterly increase since Q1 of 2022. Exports only saw a 2% increase.
Following the report, stock market futures rose while Treasury yields fell.
Joseph Brusuelas, chief economist at RSM, commented that the growth composition was one of the best mixes observed in a while. He stated that the report supports the notion of a productivity boom in the American economy, which is expected to enhance living standards through lower inflation, increased employment, and rising real wages.
On the inflation front, the personal consumption expenditures price index, a crucial measure for the Federal Reserve, rose by 2.6% in the quarter, down from a 3.4% increase in Q1. Excluding food and energy, core PCE prices, a key long-term inflation indicator for the Fed, increased by 2.9%, compared to a 3.7% rise in the previous period.
Treasury Secretary Janet Yellen viewed the GDP report as confirmation of the steady growth and declining inflation trajectory in her remarks delivered in Rio de Janeiro on Thursday morning.
Another important metric, final sales to private domestic purchasers, which the Fed considers a reliable indicator of underlying demand, grew at a 2.6% rate, consistent with the prior quarter.
However, the report highlighted a deceleration in the personal savings rate, which stood at 3.5% for the quarter, down from 3.8% in Q1.
Recent data has shown concerning trends in the consumer sector. A report from the Philadelphia Federal Reserve indicated record-high credit card delinquencies and revolving debt balances, despite banks tightening credit standards and reducing new card originations.
Nevertheless, retail sales figures have continued to rise, suggesting that consumers are managing challenges posed by high interest rates and persistent inflation.
Pressure is also evident in the housing market, with declining sales and rising home prices creating difficulties for first-time homebuyers.
Federal Reserve officials are expected to maintain interest rates at their upcoming meeting, although market expectations point to the first rate cut in four years in September. Policymakers have been cautious about the timing of rate reductions, but recent statements suggest a growing willingness to ease policy, with most central bankers indicating that further rate hikes are unlikely.
In other economic news on Thursday, the Labor Department reported that initial jobless claims totaled 235,000 for the week ending July 20, down 10,000 from the previous week and in line with the Dow Jones forecast. Continuing claims, which lag by a week, decreased to 1.85 million.
Additionally, durable goods orders, which include significant items like aircraft and appliances, unexpectedly dropped by 6.6% in June, contrary to the forecast of a 0.3% increase. However, excluding transportation, new orders rose by 0.5%.
